If you finance automobiles to consumers, it is important to be aware of the federal consumer fraud laws affecting auto creditors and regulations that apply when a creditor transacts a loan. The Federal Trade Commission and the Consumer Financial Protection Bureau (CFPB) have become increasingly active in enforcing laws implicated in auto loan transactions.
Sometimes a consumer seeks direct lending from a lender in advance of the auto purchase (e.g. a consumer calls the bank to get pre-approved for a loan and then takes that loan approval to the dealership). In other cases, the dealership encourages the consumer to use indirect financing through a third party that the dealership has a relationship with. In this case, the consumer enters into a contract for purchase with the dealer. The dealer then sells the contract to its independent financing company affiliate, often a non-bank auto finance company. Indirect financing receives the bulk of scrutiny from regulatory agencies because of dealership discretion and the potential for misleading consumers through the marketing and sale of products or services supplementary to the auto loan.
Broadening Reach of CFPB
Dodd-Frank currently does not give the CFPB supervisory authority over non-bank auto finance companies. In September 2014, the CFPB proposed a new rule to broaden authority to the non-bank automobile finance market. The CFPB would consequently be able to supervise any company that transacts ten thousand or more in loans or leases in a year.
Given the breadth of expanding jurisdiction, it is likely that authority will eventually expand to car dealerships that use third-party service providers to finance vehicles.
An example of the broadening reach of the CFPB occurred when DriveTime, a “buy here, pay here” dealer, was ordered to pay a civil money penalty of $8,000,000 to the CFPB for numerous violations of consumer financial laws. Some of the prohibited activities included:
- Failure to implement internal policies and procedures to maintain accurate consumer data.
- Harassing consumer references.
- Using third-party databases to find new numbers and then harassing those wrong numbers despite requests to stop.
- Calling consumers at work after being told by consumers on numerous occasions not to call.
- Reporting inaccurate information to credit reporting agencies regarding dates of repossession thereby violating the Fair Credit Reporting Act.
- In another violation of the Fair Credit Reporting Act, mishandling consumer disputes pertaining to the inaccurate reporting of information to credit reporting agencies. DriveTime did not correct the inaccurate information in a timely fashion and sometimes not at all even after notifying consumers the information had been corrected.
FTC and Deceptive Trade Practices
Even though the CFPB does not yet have jurisdiction over car dealerships, the FTC can still enforce deceptive trade practice laws and regulations.
Deceptive trade practices can be employed at any phase of the loan transaction. For example, pre-loan activities such as advertisements can be misleading as to APR and payment terms. The loan application process may even directly or indirectly discriminate against people of a particular age or race. And products pushed onto consumers such as extended warranties, GAP insurance, and road service all have pitfalls for deceptive or harassing marketing activity. Another activity ripe for scrutiny by enforcement agencies is advertising. When evaluating the integrity of the advertisement, the terms must actually be available through the creditor and clearly state restrictions and qualifications (e.g. 60 months 1.9% for qualified buyers only or college student rebates).
Unfair, deceptive, abusive acts or practices (UDAAP) in connection with marketing or selling financial products or services fall under Subpart C of Dodd Frank. Prohibitive practices generally arise from failing to accurately and completely communicate the costs or scope of the products. For example, if GAP insurance is marketed and represented to the consumer as being a “pennies on the dollar” investment, but ends up costing an additional $50 per month, that is arguably deceptive. For additional information about consumer fraud laws affecting auto creditors, the CFPB has released a bulletin describing certain acts or practices related to the collection of consumer debt that could potentially constitute UDAAPs prohibited by the Dodd-Frank Act.
Truth in Lending
Subpart C of Regulation Z of the Truth in Lending Act addresses transactions that would apply to auto loans. Subpart C requires a creditor to provide the consumer with a written disclosure of material terms before the parties execute the credit agreement. Material terms include the annual percentage rate (APR), any financing fees, the payment schedule (including balloon payments or early pay-off fees), the total amount financed, and late fees. Regulation M implements the Consumer Leasing Act and applies to auto loans among consumer leases generally. Material terms for leases would include the amount due at signing and the standards for wear and use on the vehicle before additional fees were assessed. See 12 CFR Part 213.
Fair Debt Collection Practices
On the back end of the transaction, if a borrower is delinquent, the creditor must be aware of the prohibitions for collection activity under the Fair Debt Collection Practices Act (FDCPA) so as to avoid enforcement actions by the CFPB. See 15 U.S.C. 1692(d-f) for more on prohibited activities.
Avoiding Violations of Consumer Fraud Laws Affecting Auto Creditors
As an auto creditor, instituting policies and procedures for mitigating exposure to investigations from consumer financial protection authorities is critical. These policies and procedures should focus on:
- Training programs for employees on how to address consumers during initial and subsequent communications.
- Controlled marketing practices to avoid misrepresentations around consumer rights and references to credit reports.
- Compliance with other Federal Consumer Laws as a lot of the requirements dovetail.
- Technology to improve record retention and bolster data security to prevent mishandling of consumer data.
- Improving disclosures related to credit reporting thereby reducing consumer disputes.
- Accounting practices to be able to withstand external audits around substantiating debts.
Another common compliance practice when presenting these products is to videotape the lending agent’s explanation of these financial products and services when the consumer is purchasing the vehicle.
Investing in compliance infrastructure can save on not only potential fines, but the cost associated with negative public perception from consumers.
For More Information About Consumer Fraud Laws Affecting Auto Creditors
Snellings Law LLC is fully equipped to handle virtually all commercial litigation matters including consumer fraud. To learn more about consumer fraud laws affecting auto creditors, call 973.947.7052 to schedule your initial consultation with one of our trial-tested litigators. Flexible hours are available.